What’s wrong with the North Slope, a world-class oil resource that has experienced flat investment rates at a time of soaring oil prices?

The State changes fiscal course too often and is micromanaging the industry and that creates instability, the Legislature’s tax consultants explained.

Janak Mayer, manager of PFC Energy’s upstream production, told the Special Senate Committee on TAPS Throughput that Alaska, like Alberta, is characterized as having high sovereign risk because it frequently changes its oil and gas fiscal terms. The State also is seen as pulling levers in the system to attempt to manage at the micro level.

Mayer cited the tax credit for the first jack-up rig in Cook Inlet as a good example of pulling micro levers in the fiscal system.

Companies want stability when making large capital investments with long payout periods, Mayer said, using Pioneer Natural Resources’ experience with the Oooguruk field as a good example of lack of fiscal stability.

The discovery and investment decision were made under ELF, Mayer said. That is the State’s former gross production tax, including an economic limit factor, hence the acronym ELF.

Oooguruk was challenged under ELF, Mayer said. Pioneer applied for and received royalty relief for some of the leases in the project in 2005 and Pioneer sanctioned the project even though it was a high-cost project with lots of issues.

Then the State changed its tax regime in the fall of 2006, passing the Petroleum Profits Tax (PPT). Two years later, when Oooguruk began production, the Legislature had enacted ACES, Alaska’s Clear and Equitable Share.

The project economics were much, much more challenging under ACES than they were under ELF, when the project was started, Mayer said.

‘Education or oil tax reform: A false choice’

Jim Johnsen, a founding member of the MACC board, authored an insightful opinion piece on the relationship between oil taxes and quality education that ran in the Juneau Empire.

“I am about as pro-education as a person can get, but it’s crystal clear that spending more on education does not in and of itself drive student success, not in Alaska anyway. And it’s just as clear that taxing oil companies at the highest rates in the country does not drive increased oil production.”

We have a speaker to meet your needs

MACC can dispatch speakers to all parts of Alaska to talk to groups and employees about the need to meaningfully reform Alaska’s oil taxes. To schedule a presentation, contact Julianne at MSI Communications.

Memorable quotes

The easy oil is gone and the cost to develop new sources of oil is many times that of earlier developments. Alpine was developed for a billion dollars and delivered 80,000 barrels per day but now CD5 will cost a billion dollars and deliver 18,000 barrels under a very different and less profitable tax policy.”

Douglas Smith, President, Little Red Services

We have used this analogy before, but it still rings true. The North Slope oil province is like a tree, with the two great legacy fields being its trunk, and with the other fields being branches rising out of the trunk. If one peels the bark off all the way around the trunk and makes it unhealthy, all the other branches will become unhealthy too, no matter how robust they might have been if the trunk stayed strong.

Kara Moriarty, Executive Director, Alaska Oil and Gas Association

I support our private sector economy and believe in the simple formula that if we want less of something, we tax it more, and if we want more of something we make it profitable. We are seeking the “sweet spot” at which Alaska’s taxes provide a competitive investment environment, but are not overly generous, as well as a system that balances front-end exploration incentives with reasonable taxes on out-year production.

Rep. Mike Hawker

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